April 25, 2010

Outfoxing the Counterfeiters The new $100 bill is the most sophisticated attempt yet to combat forgery. Since colonial times, the U.S. has engaged in a cat-and-mouse game with criminals and foreign governments eager to pass off brilliant fakes.

U.S. Dept. of the Treasury/Associated PressThe redesigned $100 bill, above, has security features like microprinting, color-shifting objects and a 3-D ribbon.

In 1690, the Massachusetts Bay Colony became the first government in the Western world to issue paper money. Some of the first counterfeiters of paper money followed soon after. Within a generation, the authorities were engaged in a running battle against forgers, whom they tried to deter by various punishments: cropping their ears, for example, or hanging them. Many colonial notes soon came with a pointed warning: “To counterfeit is DEATH.”

Last week, in a ceremony attended by Timothy Geithner and Ben Bernanke, government officials showed off a high-tech $100 bill designed to frustrate 21st-century counterfeiters. It features the pleasing pastels already seen on lesser denominations, as well as a ghostly image of a quill pen and a copper inkwell containing a bell that appears and disappears depending on the angle from which it’s viewed. Most startling of all, the front of the bill contains a vertical purple strip that contains shimmering images of the number “100” and the Liberty Bell, all of which miraculously appear to move when the bill is tilted in one direction or another.

Follow the Benjamins

We tracked the evolution of the $100 bill from the Revolution to present day.

Courtesy Heritage Auctions (www.HA.com)A $100 Greenback from the Civil War

With well over a half trillion dollars in “Benjamins” in circulation around the world, the existing $100 bill has attracted the attention of countless counterfeiters. Most have been sophisticated criminal gangs, but there’s also a considerable (if controversial) body of evidence linking the most realistic and dangerous counterfeits—the so-called supernotes—with the North Korean government. These twin threats, more than anything else, have driven this latest eye-popping change to our money supply.

If history is any guide, it won’t be the last. Paper money in this country has followed a familiar trajectory: new designs, new dollars and, eventually, new counterfeits.

It’s perhaps appropriate that Benjamin Franklin appears on the most valuable denomination of dollar in circulation. He designed the country’s first money: the Continental dollars issued during the American Revolution to pay the costs of the war. Franklin didn’t put his own head on the currency; rather, he used a mysterious anticounterfeiting device he had devised several decades earlier.

This was the so-called nature print, which consisted of an image of a leaf or leaves. It was extraordinarily lifelike, and with good reason. Franklin had devised a way of taking a plaster cast of the surface of a leaf. That in turn could be used to cast a lead plate that would be used to print the notes. Because every leaf was unique—with a complex web of veins of varying thickness—the notes were very difficult to counterfeit.

The counterfeiters who attacked the new dollar weren’t in it for the money. They wanted to undermine the revolutionary war effort, and they spared no expense to do so. In 1776, the British occupied New York City and the counterfeiters who had already set up shop began operating under the supervision of the imperial authorities, churning out massive quantities of notes that visitors could buy for pennies and then pawn off on unsuspecting revolutionaries.

The New Security Features

The British hadn’t invented the idea of counterfeiting as a weapon of war; counterfeiting enemy currency is a tactic that dates back to antiquity. Still, the patriots viewed these imitations as unsportsmanlike in the extreme. George Washington fumed in his private correspondence that “no Artifices are left untried by the Enemy to injure us.” Thomas Paine was even more outraged, publishing an open letter to the British commander in which he assailed the decision to counterfeit the dollar. “You, sir,” he wrote, “have the honor of adding a new vice to the military catalogue, and the reason, perhaps, why the invention was reserved for you, is, because no general before was mean enough even to think of it.”

The quality of the British counterfeits undercut the credibility of the dollar, but the real blame for the dollar’s decline lay with the revolutionaries, who issued vast quantities of Continentals to pay the costs of the war. Backed by nothing more than a shaky faith in the government, the notes depreciated, eventually becoming nearly worthless. The experience left Americans with serious misgivings about paper currency, both counterfeit and real.

The Constitution was a product of those fears. The monetary clauses of the Constitution forbade the individual states from issuing paper money or coins, though it did permit the federal government to “coin money.” It was silent on the question of whether the federal government could issue paper money, though most assumed it lacked that prerogative.

Yet paper money flourished, thanks to private banks chartered by state legislatures. These banks began issuing their own paper money in denominations and designs of their choice. Thousands of different kinds of “bank notes” floated in circulation, each with their own unique design. Ben Franklin and the other founders appeared on some, but so, too, did everyone (and everything) from portraits of obscure politicians, Greek and Roman gods, scantily clad women, slaves, Indians and scenes of everyday life. Even stranger things—Santa Claus, sea serpents and rampaging polar bears, to name a few—showed up on these private currencies.

It proved next to impossible to remember what genuine notes looked like, never mind counterfeits, and the opening decades of the 19th century marked what one historian has called the “golden age of counterfeiting.” In those decades, millions of dollars in counterfeit notes flooded the economy. The masterminds behind these counterfeits created them with the hope of making money, not sabotaging the country.

Many of these counterfeiters became folk heroes, running national criminal networks for the manufacture, distribution and sale of counterfeit notes. Absent effective police forces, these men and women operated with impunity. The federal government showed little to no interest in prosecuting counterfeiters, and it had few resources to do so anyway. As one newspaper editor bewailed in 1818: “Counterfeiters and false bank notes are so common, that forgery seems to have lost its criminality in the minds of many.”

Viktor Koen

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The banks fought back, commissioning ever more elaborate notes that contain many of the same anticounterfeiting features that survive today: special inks, watermarks and proprietary paper recipes. Engravers also sought to create ever more elaborate, intricate designs that would defy imitation. Yet counterfeiters still managed to surmount every technological obstacle thrown their way.

Indeed, new technology could cut both ways. Like the digital technologies of the 21st century, the invention of photography opened up new vistas in counterfeiting. Until the 1850s, most bank notes came in one color: black. But a proliferation of photographic counterfeits prompted the creation of new colorful inks, including the invention in 1857 of a new kind of green ink that used chromium trioxide. The delicate green lines printed in this ink could not be replicated with the black-and-white photography of the day; it would appear as a black mass when photographed.

The Civil War began four years later, and the cash-strapped Union quickly got over its constitutional objections to paper money, issuing a new national currency that used this “Patent Green Tint.” The new notes became known as greenbacks. They soon circulated alongside another kind of national currency colored the same shade of green: the “national bank notes,” issued by banks that obtained federal charters and the right to issue money designed and controlled by the federal government.

The Confederacy issued its own paper money. Lacking skilled engravers and the necessary supplies, the “grayback” looked awful and followed the fate of the Continental, losing its value over the course of the war. Ordinary counterfeiters considered them unworthy of imitation, but enterprising and patriotic Unionists churned out millions of dollars’ worth of counterfeits while the federal government looked the other way. Many of these knockoffs had the distinction of being better looking than the originals.

The war marked a serious watershed in the nation’s monetary history—and in the history of counterfeiting. Out went the old system of local, private currencies, and in came a new national paper money. But the counterfeiters remained, and they immediately set to work imitating the federal notes. Government officials were not amused, and in the final years of the Civil War, some of the new notes contained blocks of text spelling out the statutory penalties for counterfeiting (up to 15 years imprisonment and hard labor, a $1,000 fine or both).

But these amounted to empty threats without a concerted campaign to crack down on counterfeits. That job fell to a newly created national police force: the Secret Service. Long before it protected the president, the Secret Service made its mark ruthlessly dismantling the domestic counterfeit economy. This campaign, which began in earnest after the Civil War and was largely complete by the 1890s, stirred journalists to hyperbole. In 1901, one newspaper marveled at what is breathlessly described as a “silent, unsleeping branch of the Government, which never appears in the public eye except in the act of pouncing on a victim and which never forgets a crime or a criminal.”

Making Funny Money

Some famous counterfeiting ploys—by governments and criminals—through history.

Duke Galeazzo Sforza of Milan

The Bridgeman Art Library/Getty ImagesSir Isaac Newton

Governments have long forged currency as a war tactic. In Renaissance Italy in the 1470s, Duke Galeazzo Sforza of Milan printed counterfeit Venetian ducats, to undermine the economy of the rival city-state.

In the 1690s, Isaac Newton took a job as warden of the British mint, where he prosecuted and sent scores of counterfeiters to the gallows. To catch them, he kept a network of spies across London and interviewed informants himself in pubs. His biggest catch was the notorious William Chaloner, who claimed to have reproduced £30,000 (the equivalent of about $7 million today) and was hanged in 1699.

One of the largest frauds in history is the Portuguese bank-note crisis of 1925. A con man named Alves Reis convinced a British printer that he represented the Bank of Portugal, and had them print the modern equivalent of about $125 million in bills. His scheme went unnoticed for nearly a year.

In 1926, a group of Hungarians (including Budapest’s chief of police) pleaded guilty to printing millions of French francs, partly to fund political activities and avenge territorial losses suffered by their country. However, the quality was poor, and they were soon caught by French detectives.

By the early 20th century, the currency was relatively safe from counterfeiters. It had also become more uniform and simple, particularly after the creation of the Federal Reserve in 1913. Ben Franklin made his debut on the $100 bill, and the nation’s currency became increasingly important, eventually displacing the British pound as the world’s dominant currency. Unfortunately, that rise attracted the attention of foreign governments. In a vivid demonstration of the old adage that imitation is the sincerest form of flattery, Joseph Stalin ordered his fledgling intelligence service to counterfeit the dollar. While he may have done so ostensibly to wage war on a capitalist country, the real reason lay with the Soviet Union’s desperate need for hard currency.

The extraordinarily well-made $100 bills that flowed from Soviet presses initially flummoxed the Secret Service. Yet the quality of the bills was not matched by the professionalism of the principals who orchestrated the scheme, and it collapsed after a series of arrests that began in Berlin. Soon after, the Soviets shut down the operation, fearful of international embarrassment.

The Nazis pulled off a far more successful counterfeiting operation during World War II, setting up a team of engravers and artisans in the Sachsenhausen concentration camp to manufacture stunning imitations of the British pound and the American dollar. While counterfeits of the pound went into limited circulation, they did little damage to Britain, and the project to counterfeit the dollar collapsed in the waning months of the war.

Few successful counterfeits of the dollar gained widespread circulation in the postwar era, and for decades the appearance of the $100 bill remained largely unchanged. In the late 1980s, the so-called supernote made its appearance: highly accurate $100s (and some $50s) that baffled investigators. The remarkable frequency with which North Korean diplomats were caught carrying the notes led many to suspect the secretive regime. During the George W. Bush administration, the U.S. formally charged North Korea with counterfeiting the dollar, a claim the Obama administration has echoed, if faintly.

Regardless of the source of the supernotes, they prompted the first major overhaul of the paper currency in decades. The first big change came with the introduction of the new $100 bill in 1996, which featured the “large head” design that has since become standard, along with watermarks and color-shifting ink. But the latest version of the $100 unveiled this week takes things to a whole different level.

The centerpiece of the redesign is a purple strip that runs from top to bottom of the bill. The strip is coated with hundreds of thousands of microscopic lenses in the shape of the number “100” and what seems to be the Liberty Bell. Thanks to some complex optics, these thousands of lenses combine to create a single, larger image. When the bill is angled one way or another, the strip comes alive, making it seem as if the images can move.

The technology is dubbed “Motion.” Crane, the paper company that owns the rights to the technology, says that it “represents the next generation of counterfeit deterrence.” Unlike some of the first-generation deterrents—color-shifting ink, for example—Motion works its magic even in dimly lit settings like nightclubs.

The new note is a technological marvel. But looking at all the safeguards—not only the Motion strip, but the watermark, a separate security thread, microprinting, a color-shifting “100” and the bell inside the inkwell—the effect is roughly comparable to an apartment door equipped with countless locks and latches. It screams “secure,” but the sheer abundance of security devices suggests that counterfeiters have been all too successful in breaching earlier defenses.

Crane promises that Motion will impose “tremendous barriers against a quality counterfeit.” Perhaps. But it’s a sure bet that somewhere in the world, counterfeiters are studying the new bill, looking to crack the code. And someday they will.

Stephen Mihm is associate professor of history at the University of Georgia and the author of “A Nation of Counterfeiters.”